Exclusive News Alternative Lending

Non-bank lending eyes $1trn market

You would have to be living on the financial moon to not have seen the explosive growth of Alternative Credit in recent years.

a few stacks of coins

Non-bank lending is set to reach more than $1trn in market size by 2020, according to a new report.

Entitled Financing the Economy, it is the latest study of the alternative credit  – or private debt as it is also known – industry by the Alternative Credit Council and the Alternative Investment Management Association and comes at a significant “inflexion point” for the market.

Direct lending by funds and platforms has soared in popularity in recent years with their genesis in the years following the 2008 financial crisis. Investors like them for their punchy yields reminiscent of fixed income in its golden years. Borrowers like their services owing to the difficulty to secure SME lending following banking retrenchment in this area.

Most commentators agree demand is largely driven by the persistent low interest rate environment and a dearth of attractive yield opportunities in fixed income, meaning institutional investors  are struggling “to deliver on their basic objectives,” as the report notes.

“Consequently, the attraction of demonstrably higher yield opportunities from private credit investments has resulted in an increasing number of those institutions allocating to this area,” it said.

The market, the report says, is currently around $600m in size but within the next few years this is likely to nearly double in size, reaching $1trn by 2020. A falling level of ‘dry powder’ as a percentage of total assets under management, shows the strong demand for borrowing with unused cash at its lowest level in four years.

“The momentum in the development of the private credit industry shows no sign of slowing. As the value of this form of funding becomes better understood by policymakers, we are seeing the introduction of supportive legal and regulatory reforms. With private credit offerings emerging in new regions, the industry is now truly global,” the report’s authors said.

Since 2000, the AUM of the private credit industry has grown nearly fourteen-fold, with a compound annual growth rate (CAGR) of just under 20 per cent.

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